Climate action: the long and winding road?

Sometimes current events run into each other, overlap, with one’s shadow overcasting the other. It is no small irony that, as the COP 24 got underway, with trumpeted ambitions, from UN Climate Change Executive Secretary Patricia Espinosa herself, that it would be “Paris 2.0”, the French government was announcing its decision to, at least temporarily, shelve an increase in petrol tax planned for January 1st 2019 and taunted as a “carbon tax”. After weeks of protests by the so-called Gilets Jaunes (Yellow Vests), a grassroots, spontaneous movement born and organized through social media and bringing together people from all across the political spectrum in their opposition to this tax increase, the French government has ceded to the pressure from the street. This “carbon tax”, in effect an increase of existing petrol taxes, did represent a basket case of what not to do in terms of environmental policy, and it should therefore not come as a surprise if it has raised such opposition. The tax would have hit the wallet of lower income people disproportionally compared to wealthy ones, perpetuating a sense that, when it comes to fighting climate change, it is the poor, within each countries as well as the poor countries globally, that are asked to do the biggest sacrifice. In the case of France, it was those people depending on their cars to go to work, the very people whose petrol demand, at least over the medium term, is inelastic to petrol prices. Furthermore this measure would have increased the tax on the fuel (petrol/diesel) lower income people most depend on, whilst leaving untouched the tax free status of jet fuel, on which wealthy globe-trotters depend most. The reason for this anacronysm lies in a little known international agreement signed in Chicago in 1944 and ratified by 191 countries, amongst them France, forbidding any country from imposing any tax on jet fuel, the most polluting energy source used to transport goods and people based on the grams of CO2 emitted per kilometre per passenger.

Coming back to the COP 24, now is a good time to look critically at what has been achieved since the landmark agreement on CO2 emission reductions reached during the COP 21 in 2015. The agreement defined a goal, prevent global average temperatures from rising above 2 degrees Celsius from their pre-industrial levels, and a method, that every country define its own objectives in terms of CO2 emissions in line with the 2 degrees scenario.

It doesn’t take a very close look at what has been announced so far to realise that we are nowhere near the level of commitments by individual countries required to achieve that 2 degrees scenario. According to Climate Action Tracker, as of December 3rd 2018, as the COP 24 conference got underway, only 7 countries had committed in their National Climate Action Plans (NCAP) to CO2 emission levels compatible with the 2 degrees target. The current proposal from the European Union, encompassing emissions from all member states, still fall well short of the required reductions needed by 2030, lying within a range more in line with a 3+ degrees temperature increase than the Paris objective. The UN Environment Programme does sum it up in its latest Emissions Gap Report, stating that not only have we probably missed the 1.5 degree target, but that the perspective of not overshooting the 2 degrees target look bleak, putting us on a path towards a 3.2 degrees temperature increase.

The very purpose of the COP 24 is precisely to evaluate the effort that have been so far announced by the Paris agreement signatories. However, we already know, without being unnecessarily pessimistic, that it will be too little. If only, because the 2nd biggest emitter of CO2, the United States, is not submitting NCAPs.

As investor, as manager entrusted with retirees’ assets, family savings, insurance reserves, the investment management industry stands in the thick of this global challenge faced by humanity. To put it in its simplest form, our clients are asking for their money to be invested in a way compatible with the continuation of human life on earth. It is therefore no wonder that since 2009, the assets invested by European investors in themed strategies, such as energy efficiency, climate change solutions, etc, has grown from virtually nothing to 148 billion euros as of 2017. Whilst governments have for the most part so far dithered, failing to adopt the bold decisions needed to avert catastrophic climate and ecosystem disruptions, investors have been acting.

Candriam has been at the forefront of this drive to climate change integration, with today [30] funds with a carbon footprint on average 50% below the broader market. What this means is that, for instance, 100 000 euro invested in our funds will in turn be invested in companies whose emissions are 50% below their peers. This is a concrete, measurable way through which we are addressing climate change, today. And this is just the beginning. We are also excluding the most CO2 intensive fuel used for power generation, namely coal, from all our portfolios. If the existing coal reserves, those on coal producers’ balance sheet, were to be burnt to produce power, humanity can forget its 2 degrees target, or 3 degrees, or even 4 degrees. Therefore it is for us a matter of good fiduciary management to stay clear of an industry whose main asset, coal, will need to remain stranded.

The same trend is witnessed across the investment industry, to varying degrees of credibility and conviction. As investors, we draw hope from the fact that companies themselves, and amongst them some of the most polluting ones, are finally showing signs of getting serious about climate change. The latest example, quite emblematic, is provided by the announcement early December by Shell’s CEO, that the company would commit to a clear target in terms of CO2 emissions reduction. This change of heart by one of the largest oil & gas producers was made possible following an intense dialogue between the company and a combination of large investors and NGO’s.

We can expect further similar announcements in the coming months from companies on their carbon strategy and objectives, especially as the COP24 is under way. In particular within the broader context of the implementation of the TCFD recommendations, an intricate set of guidelines emanating from industry participants themselves with the aim to standardise the disclosure of their exposure to climate risk and opportunities.Governments have a major role to play in steering consumer behaviours towards climate friendly products and solutions, and the industry must play its part in answering this need. At Candriam, we welcome these recent developments emanating from the industry and will continue to support them and lead the investment industry towards further adoption of a climate-proof approach.